Covid-19 wipes out eight years of UK dividend growth

The respected Dividend Monitor report reveals that it is unlikely dividends can regain their previous highs until 2025 at the earliest.

Covid-19 cut UK dividends by two-fifths in 2020 in the worst period for payouts since the Second World War, according to the latest UK Dividend Monitor report from Link Group.

The pandemic resulted in almost £40 billion of dividend cuts last year, excluding special dividends. Covid-related cuts started at the beginning of the second quarter and reached £39.5 billion by the end of the year.

Dividends fell 44% last year to £61.9 billion on a headline basis, the report found, the lowest annual total since 2011.

Underlying dividends, which exclude special payments, fell 38.1% to £61.1 billion.

Some two-thirds of companies cut or cancelled their payouts between the second and fourth quarters. In contrast, just over a quarter of companies were able to increase their payouts.

Payout cuts from the top 100 companies were less severe than those seen among small- and mid-cap firms, down 35% compared to 56% from smaller companies over the year.

Some 53% of the top 100 cut or cancelled payouts between the second quarter and fourth quarter, compared to 63% of the FTSE 250.

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Banks and oil majors axe payouts

The financial sector was responsible for the biggest impact, accounting for two-fifths of pandemic-related cuts between April and December, with £16.6 billion of dividends cut or cancelled. The outright cancellation of banking dividends accounted for four-fifths of this. Across the rest of the financial sector, payouts fell by a third, slightly better than the wider market.

The next biggest impact was from the oil sector, costing shareholders £8 billion in lost income. Having struggled to sustain their very large payouts in recent years, the UK’s oil majors took this opportunity to reset their dividends to more sustainable levels, collectively three-fifths lower than before, says Link. “They can now grow from this lower level, but since this sector has historically paid the highest dividends, this big reduction largely explains why it will take many years for UK plc dividends to regain previous highs. Royal Dutch Shell (LSE:RDSB) has already made a small symbolic increase and we do expect further progress over time,” the report said.

Almost a tenth of the cuts were made by mining companies, whose dividends fell by two-fifths. Glencore (LSE:GLEN)’s £2.2 billion cancellation made the biggest impact. Miners often pay special dividends, but these were sharply curtailed too.

Apart from the banks, companies dependent on discretionary consumer spending made the biggest percentage cuts. Altogether, the various consumer discretionary sector payouts fell by £5.5 billion, a decline of three-quarters. In this group, retailers and the airline, leisure and travel sector saw falls of more than 95%.

The classically defensive sectors of healthcare, basic consumer goods, food producers and food retail were true to type in 2020. Their dividends were flat or only slightly down between the second and fourth quarter.

The outlook from here

The last quarter of 2020 was stronger than expected as some companies such as Sainsbury's (LSE:SBRY) and Ferguson (LSE:FERG) began restoring their payouts to beat forecasts. This year, Link predicts a best-case increase of 8.1% on an underlying basis, or 10% including special dividends, but a worst-case scenario could see dividends fall again in 2021.

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However, Link does not expect UK dividends to return to their previous highs until 2025 at the earliest.

“A slightly better end to 2020 may be a cause for relief but not for celebration,” says Susan Ring, chief executive officer of corporate markets at Link Group. “This was a dreadful result for UK investors, especially those for whom dividends are a major source of income. UK payouts have been more severely impacted than in most comparable countries because of their heavy concentration in the hands of just a few very large companies, mainly in the oil, mining and banking industries – all sectors that have had to cut dividends steeply.

“There are reasons for optimism, but the resurgent pandemic has pushed back the reopening of the economy even further, especially in the UK.

“The social and economic scars of Covid-19 will be deep. We think it is highly unlikely dividends can regain their previous highs until 2025 at the earliest, and potentially even a year or two after that.”